Structured financial instruments

ABSTRACT

A method of assembling a structured financial instrument, including electronic methods of pricing, selling, and administering the structured financial instrument are provided. A minimum deposit and a specified term are specified. The structured financial instrument is indexed to at least one economic indicator. A percentage of the original deposit may be withdrawn at a specified interval without penalty, with interest calculated at the end of the term reduced to reflect any prior partial withdrawals. The structured financial instrument is insured from the FDIC. In the event of death, a death benefit is provided equal to the value of the structured financial product on the date of death. At a specified time, a structured financial product holder has an option of choosing to lock in a specified percentage of the index gains to date, in exchange for re-upping the structured financial product into a new structured financial product of equal or greater term length and using a similar return framework as the original structured product. In additional embodiments, nursing home liquidity and required minimum distributions liquidity can be provided.

FIELD OF THE INVENTION

The present invention relates to financial products.

BACKGROUND OF THE INVENTION

Structured financial products are considered by many to be among thefastest growing segments in the financial services industry. Sales ofstructured products began in the European markets in the 1980's andrepresent a significant part of the European investment market. Theseproducts entered the U.S. market in the 1990's as they gained popularitywith institutional investors. Today, the U.S. structured productsindustry is still in its infancy, but the industry is expanding. In2007, the market for structured products hit about US $145 B in newsales (from about US $64 B in 2006), eclipsing the market for bothconvertible securities and closed-end funds, and just behindexchange-traded funds and hedge funds.

The recent growth of structured products can be attributed to a volatileinvestment climate, better pricing, and increased exposure. The ideabehind a structured investment is relatively simple: to create aninvestment product that provides the opportunity for market-linkedreturns while mitigating the risk of loss—in other words, upsidepotential with downside protection. This is accomplished by selectingunderlying investments that provide the desired return/risk of loss,which underlying investments typically include futures, swaps, options,and the like. The mix of investments supporting the structured productdetermines its potential upside, as well as downside protection, taxtreatment, time horizon, and other considerations.

Structured investments can be differentiated from other investments as aresult of: structured investments have a defined maturity date; manystructured investments have principal protection as a feature, somethingthat equities-backed mutual funds do not do; and structured investmentscan be highly targeted to a specific investor's market view and risktolerance. Examples of structured products include Principal ProtectedNotes (PPN) and Principal-Protected Market-Linked CDs (“MLCD”). Both ofthese products are appealing options to those seeking full protection oftheir original investment along with the potential for greater returnsby linking to an outside financial index, often an equity index.Investors typically give up a portion of any equity appreciation inexchange for the principal protection.

A difference between PPNs and MLCDs is that MLCDs issued by a domesticbank offer principal protection from the Federal Bank Deposit InsuranceCorporation (FDIC), 550 17th Street, NW, Washington, D.C. 20429, whichprotects investors from losses if the bank issuer fails. Recently, theFDIC raised this protection from $100,000 to $250,000 per depositor, perbank, temporarily on non-tax qualified, which matches the permanentprotection level on tax qualified investors.

Structured products are typically issued by domestic and foreign banks.Structured products normally are designed for ‘buy & hold’ investors whowant to make a lump sum investment that will mature over time, normallyafter 3 to 6 years. The pay-out features (i.e., the maturity, underlyingindex, and pay-out formula) are fixed prior to issuance and are designedto remain unchanged throughout the life of the investment. The processesthat are structured into an MLCD can be quite complex. Liquidity withsuch products also must be taken into consideration by an investor.Because MLCDs generally guarantee a return of principal if held tomaturity, MLCDs are not regulated as securities and are not resold on aformally traded market Liquidating prior to maturity on limitedsecondary markets can result in losing gains and possibly someprincipal.

When an investment, such as a MLCD, says it is linked to an equityindex, it is referring to the multitude of stock indices that are usedto gauge the performance of the economy. These indices track theperformance of a specific ‘basket’ of stocks that represent a particularmarket or sector of the stock market or the economy. These indices alsofunction as benchmarks against which investors can evaluate theperformance of their own portfolios.

Original market indices were invented by nineteenth-century Wall StreetJournal editor and Dow Jones & Company co-founder Charles Dow. Dowcompiled an index to gauge the performance of the industrial sector ofthe American stock market, called the Dow Jones Industrial Average.Today, there are numerous market indices that are used to gauge theperformance of the U.S. stock market, such as the New York StockExchange Composite (NYSE Composite), the Standard & Poor's 500 (S&P500),and the Russell 2000 index. In addition, foreign stock market indiceshave been developed to track international equity markets, such as theFinancial Times Stock Exchange Index (FTSE index), the Deutscher. AktienIndex (DAX index), and the Nihon Keizai Shinibun (NIKKEI) index.Specific market sectors are also tracked by equity indices, such as theBiotech Index (BTK) and the Dow Jones Transportation Average (DJTA), toname a few. There are indices that track almost every conceivable sectorof the economy and stock market

The indexes attempt to track the performance of different specificsegments of the economy, and some try to provide an overall view ofbroad segments. In the U.S., the most commonly used include the DowJones Industrial Average, the New York Stock Exchange Composite Index,the Standard and Poor's 500 Composite Stock Price Index, the NasdaqComposite, and the Wilshire 5000. The Dow Jones Industrial Average(DJIA), Dow Jones, & Co., 1 World Financial Center, 200 Liberty StreetNew York, N.Y. 10281, consists of 30 of the largest and most widely heldpublic companies in the U.S. and is one of the most widely quoted of allthe market indicators. The DJIA includes significant companies with ahistory of successful growth and wide investor interest. The DJIAincludes a wide range of companies, from financial services companies tocomputer companies to retail companies, but does not include anytransportation or utility companies. These 30 stocks represent about afifth of the approximately $8 trillion-plus market value of all U.S.stocks and about a fourth of the value of stocks listed on the New YorkStock Exchange.

Because the Dow Jones Industrial Average index only contains 30companies, some believe this index is outdated and does not trulyrepresent the overall market. Many practitioners prefer to use theStandard and Poor's 500 Composite Stock Price Index or the Wilshire 5000as market benchmarks. The Standard and Poor's 500 Composite Stock PriceIndex (S&P 500), Standard & Poor's, 55 Water Street New York, N.Y.10041, first developed in 1923, is probably the most commonly referencedU.S. equity benchmark. The companies included in the S&P 500 tend to berepresentative of important industries within the U.S. economy and manyalso are the leaders of their industries. However, the companiesincluded in the S&P 500 are not necessarily the largest companies intheir sector: Standard & Poor's removes and replaces companies in theindex based upon business trends. When the U.S. Department of Commercedeveloped its Index of Leading Economic Indicators in 1968 to signalpotential turning points in the national economy, it chose the S&P 500as one of the components. The S&P 500 is used by an estimated 97% ofU.S. money managers and pension plan sponsors. Approximately $626 B isindexed to the S&P 500.

Most analysts use the S&P 500 as their preferred benchmark index thanksto its diversified sector coverage, which today contains over 100 uniquesectors, as well as its market capitalization weighting (that is, eachstock's weight in the index is proportionate to the stock's marketcapitalization). Because the index is weighted by market capitalization,the largest firms have the greatest impact on the value of the S&P 500;some view the market capitalization weighting as a flaw.

The Wilshire 5000 is considered the ‘total market index.’ Designed totrack the value of the entire stock market, the index was started in1974 by Wilshire Associates, 1299 Ocean Avenue, Suite 700 Santa Monica,Calif. 90401. Though it is the nation's broadest-based index, andprobably the most accurate reflection of the overall market, it is notfrequently cited in the financial press as a gauge for the market'sreturn. The reason for this is that it is often considered ‘too broad’ adefinition of the market. Most practitioners prefer to use the S&P 500as a proxy for the overall market, especially since it encompasses 70%of its market value. The remaining 30% of the market, which consistsprimarily of small-cap stocks, is generally considered to be representedby the Russell 2000 Index.

The Nasdaq Composite is a broad market index that encompasses about4,000 issues traded on the national market of the National Associationof Securities Dealers Automated Quotations (Nasdaq), One Liberty Plaza,165 Broadway, New York, N.Y. 10006. The Nasdaq first started in Februaryof 1971 as the world's first electronic stock market. The NasdaqComposite Index is comprised of virtually every firm that trades on theexchange. Like the S&P 500, the Nasdaq Composite is calculated based ona market capitalization weighting. The top ten stocks in the indexaccount for more than 30% of the Nasdaq Composite's value. Becausetechnology firms account for roughly two-thirds of the index, investorsoften use the Nasdaq Composite Index as a guide to determine thestrength of technology stocks. Because-this index also contains manyunproven and speculative companies, the Nasdaq Composite Index tends tobe more volatile relative to the other major indices.

In 1966, The New York Stock Exchange Composite Index (NYSE) began as away to track the price movements of all common stocks listed on the NewYork Stock Exchange, 11 Wall Street, New York, N.Y. 10005. This index isalso market capitalization weighted. The index consists of a compositeof all common stocks listed on the NYSE. Four NYSE subgroup indexes alsoexist, namely Industrial, Transportation, Utility, and Finance.

An emerging type of market-linked product available to investors isFixed Indexed Annuities—also known as Equity-Indexed Annuities (EIA).EIAs made their debut in 1995 and gained popularity due to volatility inthe stock and bond markets. Like other annuities (annuity, meaningpayments paid over time, possibly after an accumulation period), EIAsare intended to be retirement savings products issued by life insurancecompanies. EIAs are marketed as providing an equity-indexed return, butwith a minimum return floor. In 2007, approximately $25 billion in EIAswere sold. Over the years, approximately $123 billion in EIA assets havebeen accumulated, with approximately 58 insurance companies currentlyissuing indexed annuities. Marketed primarily to those reachingretirement age, investors who have purchased annuities view them as away to provide additional retirement income and as a safety net in casethey or their spouse lives beyond their life expectancy. Today, thereare many variations on the EIA concept each has its own unique featuresand return philosophies, all of which can affect overall performance.

An EIA is a type of deferred annuity that earns returns linked to anequity index, similar to MLCDs. Because an EIA is a fixed annuity,investors may earn an attractive minimum return on their money (e.g., 2%per year), while deferring taxes on gains. EIAs have not been federallyregulated and brokers did not need a securities license to sell EIAs,until a recent Securities and Exchange Commission action, which remainsunsettled. EIAs are not FDIC-insured and are subject to the risk ofdefault by the issuing insurance company.

An EIA is a contract between an individual and an insurance company. Aninvestor pays premiums into a policy for the purpose of accumulatingsavings when they are younger, and then the insurance company pays thesavings back, either in a lump sum or in a stream of income atretirement (called annuitization), making for a kind of self-fundedpension. Premiums can be made in one limy-sum or by paying installmentsover time. EIAs offer a minimum annual guaranteed interest rate(typically 1%-2%), but also offer market-linked growth potentialassociated with changes in one or several distinct indices over definedperiods, without the risk of directly participating in the underlyingmarket. Interest is calculated using a defined formula based oncalculated changes in the index. The terms of the EIA contract dictatehow interest is calculated when it is credited. Some EIAs creditinterest at the end of the term only, while in other EIAs, a percentageof interest is credited annually or periodically.

Variables that can determine how much interest is credited on an EIAinclude: participation rate, interest rate return caps, and spread fees.A participation rate determines how much of the associated index's gainwill be used to calculate the interest earned. For example, if theparticipation rate is 90% and the index increases 10%, the interest ratewould be 9% (10×0.9=9) over the applicable period. For a $1,000investment, a gain of $90 would be seen. Participation rates vary amongEIAs, but rates of 70% to 90% are typical.

Some EIAs set a maximum rate of annual interest that the EIA will creditover a specified period. If a contract has an upper annual limit, orcap, of 7% and the index linked to the annuity gained 7.2%, only 7%would be credited to the annuity for that year. Some EIAs have a spreadfee instead of, or in addition to, the participation rate. The spreadfee is a percentage that is subtracted from the index's gain. Forexample, if the spread fee is 2% and the index increases 8%, theinterest rate credited would be 6% (8−2=6). If there is also aparticipation rate of 90%, the interest rate credited would be 5.4%([8−2]×0.9=5.4).

Methods of calculating returns on EIAs include annual reset (or ratchet)method, point-to-point method, and high water mark or look-back method.The annual reset (or ratchet) method compares the index at the beginningof the policy year to the index at the end of the policy year. Interestis added to the value of the annuity at the end of each year. Oncecredited to the annuity, such interest becomes ‘locked-in’ because itcannot be taken away due to negative index performance. The beginningindex value is reset at the beginning of each new policy year, so futuredecreases do not affect the interest already earned. Thus, once‘locked-in’, this interest will participate in future growth, giving theinvestor the advantage of compounding in subsequent years. With theannual reset (or ratchet) method, investors are more likely to receivesome interest in the event that the EIA is surrendered early; however,investors are also more likely to have a lower participation rate,and/or a participation rate that is changed annually by the insurer.

The point-to-point method compares the value of the index at thebeginning of a multi-year term to the value of the index at the end ofthe term, disregarding fluctuations in-between. With the point-to-pointmethod, interest may not be credited to the annuity until the end of theterm. If the EIA is surrendered early, investors may not receive anyexcess interest for that term.

The high-water mark or look-back method looks at the index at specificpoints during the term (e.g., each anniversary date). The highest ofthese is then used as the end-of-term index level and compared with theindex value at the beginning of the term. The high-water mark orlook-back method could result in a higher interest rate than thepoint-to-point method if the index has moved downward towards the end ofthe term. With the high-water mark or look-back method, interest isadded to the value of the annuity at the end of the term. As with theother methods, if the EIA is surrendered early, investors may notreceive any interest for that term.

Indexed annuities typically do not apply negative changes in an index tothe contract value. Thus, if the change in index value is negative overthe course of a crediting period, no deduction is taken from contractvalue nor is any index-based return credited. The new index startingpoint ‘resets’ to the new lower level at the end of the ‘down year’ andthe next period's increase, if any, is calculated from that new lowerstarting point. For ease of understanding, FIG. 1shows—hypothetically—the basics of how a fixed indexed annuity works inrelation to a market index to which it may be linked.

Surrender charges are commonly deducted from withdrawals taken by aninvestor. The initial surrender charges, which may be as high as10%-15%, are imposed on surrenders made during the early years of thecontract and decline gradually to 0% at the end of a specified surrendercharge period, which may be 10 to 15 years. Imposition of a surrendercharge may have the effect of reducing or eliminating any index-basedreturn credited to the investor up to the time of withdrawal. Asurrender charge also could result in loss of principal, so an investorwho surrenders prior to the end of the term may receive less than theoriginal purchase amount.

The best candidates for purchasing EIAs generally have contributed themaximum amount to an employer-sponsored retirement plan (e.g., 401(k)plan) and Individual Retirement Account (IRA) and want additionaltax-deferred investments; are conservative investors who are afraid tolose money in the stock market; can keep the annuity long-term; expectto be in a lower income tax bracket at retirement; and desire aguaranteed income in retirement.

EIAs have some of the same features, benefits, and pay-out terms asMLCDs. Benefits of owning a MLCD over an EIA include: MLCDs have arelatively short time commitment, FDIC insurance of principal, smallerminimum contribution requirements, and generally lower fees. Withmarkets dropping precipitously in 2008, “Where is a flood of money goinginto FDIC-insured products,” said Matt Ginsburg, head of the customizedinvestment solutions group at Wells Fargo, 420 Montgomery Street, SanFrancisco, Calif. 94104. (Sophia Morrell, “Structured ProductsConference Report” (Oct. 1, 2008)) In a recent presentation on MLCDs,Ginsburg highlighted that “volatility has sparked a stampede toprincipal-protected products.” Investors are choosing to plot a safercourse for their investments and as a result there have been massiveoutflows from mutual funds, which have seen approximately $47 billionleave their management in 2008 alone, according to figures from theInvestment Company Institute, 1401 H Street, NW, Washington, D.C.,20005. Howard Dent, who is Marketing Director of Affluent Markets atWells Fargo, was also feeling bullish about the future of certificates:“In times of stress, people are moving from what they do not know towhat they do,” he said. “And they know CDs.” (“Structured ProductsConference Report”)

While EIAs can at least be categorized into different groups, such asannual reset or ratchet method, point-to-point method, and high watermark method, MLCDs defy easy categorization. Depending on the bankissuing the MLCD, the terminology from one bank to another can betotally different, and each can have its own subtle nuances that affectreturn. Some of the characteristics that differentiate MLCDs are thatthey specify: minimum investment, fixed term, minimum interest to beearned, and principal protection. Minimum investments vary, but areusually around $1,000 with additional investments in $1,000 increments.This relatively low minimum investment level makes these MLCDs enticingto those that would not ordinarily have exposure to this diverseassortment of investments.

MLCDs have a fixed term so investors know when their holding willmature. Typically, these terms vary from 3 to 6 years. Unlike anannuity, a partial withdrawal normally cannot be made from a MLCD. Also,gains will not be realized until the MLCD matures. Whereas an EIAprovides a minimum return on the principal, typically approximately1%-2% annually, MLCDs typically do not provide a minimum returnguarantee and will normally have some form of principal protection atmaturity. In the worst case scenario, if an investor holds a 3 year MLCDto maturity with a minimum return of 0% and the index falls each ofthose three consecutive years, the investor would not lose any of theoriginal principal, but would not gain anything either. Some productsfix the minimum return at more than 0%.

MLCDs are similar to EIAs in that the return of principal may not beobtained if the investment is sold prior to maturity. In addition, theinvestor may receive a lower return than a direct investment in theunderlying index or security.

There are a wide range of features that are characteristic for most, butnot all, structured products. The maturity value of a MLCD, over andabove any principal protection, is based on a formula defined at theoutset Like EIAs, MLCDs have several methods of calculating returns;however, the terminology in most cases is different and varies at eachissuing bank. MLCDs have ‘value dates’ which are the ‘initial valuedate’ and the ‘final value date’ specified for the particular offering.Once the value of the index is defined on those predetermined dates, thereturn is determined using the defined calculation method.

MLCDs, like EIAs, may utilize participation rates. Participation ratescan be less than 100% or greater than 100%. MLCDs can have a specifiedminimum and/or maximum interest amount that may be paid at maturityregardless of the performance of the underlying asset. In an EIA, thismaximum amount of interest is referred to as an interest rate cap. If,at maturity, the result of the interest calculation is less than thestated minimum, then the interest amount paid to the investor will bethe minimum interest amount. Similarly, if the interest calculationresults in a greater value than any stated maximum, then the maximuminterest amount would be paid. The minimum interest amount cannot beless than zero; therefore, even if the value of the underlying indexdecreases, the investor's initial investment must be returned in full atmaturity. For example, a JPMorgan/Chase Bank MLCD linked to the S&P 500has a minimum investment of $1,000 and a 100% participation rate. Atmaturity, an investor will receive a minimum return of 5% or $50 foreach $1,000 MLCD.

By way of another example, the following Table 1 shows how interestwould be computed with a 150% participation rate, a minimum interestamount of 10%, and a maximum interest amount of 50% over a range ofpossible outcomes for the underlying asset:

TABLE 1 Final Initial Value Value of of % 150% Index Index ChangeParticipation Interest 100 90 −10% −15% 10% 100 120 +20% +30% 30% 100150 +50% +75% 50%

Other types of return definitions also exist. A cliquet plan is asequence of annual resets (or ratchet) calculation periods, where theindex return parameters are fully defined at inception. Under an annualreset or ratchet, the issuer can restate the return parameters eachyear. A ladder option locks-in positive performance when pre-specifiedindex levels are reached prior to maturity.

Options are at the heart of most structured products and are theunderlying asset tool which allows the return to be customized invarious ways. Options are flexible, and investors are not limited tomaking a profit only when an index goes up. Because of the versatilityof options, investors also can make money when the index goes down oreven sideways. At any one time, investment conditions (e.g. interestrates, index/asset price volatility, etc.) influence what options can beefficiently purchased, and this in turn affects the MLCD structures thatcan be offered.

Those who typically invest in MLCDs are: seeking equity marketparticipation in a principal protected investment; seeking the depositinsurance the FDIC provides; averse to risk; willing to sacrifice somereturn for protection; interested in the potential to earn higherreturns than a traditional CD; looking for medium-term exposure; and notanticipating the need for funds from their investment before the MLCDmatures (a buy and hold investor). MLCDs also may be well suited forqualified retirement accounts such as traditional IRAs or Roth IRAs.These accounts are not considered suitable for customers who depend oninterest income for their monthly support. In times of heightened marketvolatility, investors feel the need to safeguard themselves withdownside protection.

Taxable accounts are required to report taxable income each year, eventhough they may not receive an interest payment until maturity. SuchMLCDs are treated as ‘contingent payment debt instruments’ for U.S.federal income tax purposes and are subject to special tax rules. Underthese rules, investors will generally be required to recognize interestincome in each year at a calculated yield, even though the issuer doesnot make any payments with respect to the MLCD until maturity. Taxqualified accounts will not have to pay such taxes until money iswithdrawn from these accounts.

The main risks in MLCDs include: lack of liquidity and weak indexperformance. In the event of death, a holder may redeem a MLCD at par orunder some defined amount contained in the terms of the MLCD provisions.MLCDs are not listed on an organized securities exchange. Investors maybe unable to sell the MLCD in an organized market prior to maturity, andshould an investor sell the MLCD prior to maturity on limited secondarymarkets, they may receive more or less than the original investment.

In light of current market volatility and record losses in U.S. andinternational markets, investors are increasingly cautious wheninvesting in an index. Products with principal protection and thebacking of FDIC insurance have become a more appealing way to invest.Evidence is already showing that investors are moving in this direction.In November, 2008, Barclays PLC's Barclays Capital, 1 Churchill Place,London, E14 5HP reported “monthly sales of these products are up 30-40%from earlier in the year,” according to Philippe El-Asmar, head ofinvestor solutions for Barclays. (Eleanor Laise, “Another ‘Safe’ BetLeaves Many Burned” Wall Street Journal (Nov. 11, 2008)) As a sidebenefit, the money invested in MLCDs helps provide liquidity to banksfor their lending programs. Thus, investing in bank products with thesecurity of an investment backed by FDIC insurance is a win-win.

Many investors have seen huge paper losses in their investments, withthe S&P 500 index declining from 1,497 in September of 2007 to 757 as of20 November 2008. For investors in principal protected MLCDs and EIAs,account values do not reflect the full downward movement in the index,and their principal has not been affected. Many of these investors willbe earning zero, which is more appealing that a 50% drop.

For investors who wish to invest in a MLCD, locating an appropriate MLCDmay be a challenge. The first issue they will face is that everyday,banks are issuing hundreds of new offerings. Option prices change on aconstant basis. There is no room for hesitation on the part of thebuyer. Here lies the second challenge: it takes a great deal of time towade through and understand all of the details and terms of any givenoffering. There is no uniformity in how each of these MLCDs ispresented. For those not accustomed to the legal language, it can be achallenge; but, it is also a challenge for seasoned brokers as well.“Each works differently. Adding to the confusion is the numerousacronyms companies use for each of their products. Choosing among themis not an easy task. Although many of the instruments appear similar,the distinctions are important and complex and therefore worthy ofdeeper exploration,” said David Krein, President of DTB Capital Group,95 Worth Street, New York, N.Y. 10013. (David Krein, “StructuredProducts: Opportunities, Risks, Rewards” Public Service Review:Transport, Local Government and the Regions (Issue 9, January 2007)) Dueto the complex nature of MLCDs in general, the whole industry haschallenges that need to be addressed. “Many people involved in creatingand selling structured investments agree that educating investors andrepresentatives about how the instruments work is one of the mostimportant tasks facing the industry.” (Michael Iver and Jon Asmundsson,“Winning Converts—Reverse convertibles and other structured investmentspromise to boost returns and limit risks.” Bloomberg Markets (November2007))

Thus, while existing structured products meet the needs of a segment ofthe investing population, there is a need for a financial product thatprovides easily understood terms to investors, while allowing forinvestment flexibility. There is a further need for a financial productthat lends itself to simple investment strategies. There is a furtherneed for a financial product that has a strong guaranteed component.There is a further need for a financial product that would be appealingfor the conservative investor who wants to share in upward market moves.There is a further need for a financial product that enjoys depositinsurance from the FDIC. There is a further need for a financial productthat has uniform features that apply to products issued currently and inthe future. There is a further need for a financial product thatprovides multiple liquidity provisions throughout its term so thatinvestors can access some or all of their money before the productmatures.

SUMMARY OF THE INVENTION

A structured financial product in accordance with the principles of thepresent invention provides easily understood terms to investors, whileallowing for investment flexibility. A structured financial product inaccordance with the principles of the present invention lends itself tosimple investment strategies. A structured financial product inaccordance with the principles of the present invention can have astrong guaranteed component. A structured financial product inaccordance with the principles of the present invention would beappealing for the conservative investor who wants to share in upwardmarket moves. A structured financial product in accordance with theprinciples of the present invention enjoys deposit insurance from theFDIC. A structured financial product in accordance with the principlesof the present invention has uniform features that apply to productsissued currently and in the future. A structured financial product inaccordance with the principles of the present invention providesmultiple liquidity provisions throughout its term so that investors canaccess some or all of their money before the product matures.

In accordance with the principles of the present invention, a method ofassembling a structured financial instrument, including electronicmethods of pricing, selling, and administering the structured financialinstrument are provided. A minimum deposit and a specified term arespecified. The structured financial instrument is indexed to at leastone economic indicator. A percentage of the original deposit may bewithdrawn at a specified interval without penalty, with interestcalculated at the end of the term reduced to reflect any prior partialwithdrawals. The structured financial instrument is insured from theFDIC. In the event of death, a death benefit is provided equal to thevalue of the structured financial product on the date of death. At aspecified time, a structured financial product holder has an option ofchoosing to lock in a specified percentage of index gains to date, inexchange for re-upping the structured financial product into a newstructured financial product of equal or greater term length and using asimilar return framework as the original structured product

BRIEF DESCRIPTION OF THE DRAWINGS

FIG. 1 shows hypothetical basics of how a fixed indexed annuity works inrelation to a market index to which it may be linked.

FIG. 2 shows a graphical representation of the performance of an examplestructured financial product in accordance with the principles of thepresent invention as compared to the performance of the S&P 500 index.

FIG. 3 shows a graphical representation of the performance of anotherexample structured financial product in accordance with the principlesof the present invention as compared to the performance of the S&P 500index.

FIG. 4 shows a graphical representation of the performance of theexample structured financial product of FIG. 3 for a differenttime-frame as compared to the performance of the S&P 500 index.

FIG. 5 shows a graphical representation of the performance of theexample structured financial product of FIG. 3 for a differenttime-frame as compared to the performance of the S&P 500 index.

FIG. 6 shows a graphical representation of the performance of anotherexample structured financial product in accordance with the principlesof the present invention as compared to the performance of the S&P 500index.

FIG. 7 shows a graphical representation of the performance of theexample structured financial product of FIG. 6 for a differenttime-frame as compared to the performance of the S&P 500 index.

DETAILED DESCRIPTION OF A PREFERRED EMBODIMENT

In accordance with the principles of the present invention, structuredfinancial products are provided. In more detail, in accordance with theprinciples of the present invention, structured financial products areprovided having a minimum deposit and a specified term. The structuredfinancial products can be indexed to one or more economic indicators,such as, for example, the New York Stock Exchange Composite (NYSEComposite); the Standard & Poor's 500 (S&P500); the Russell 2000 index;the Financial Times Stock Exchange Index (FTSE index); the DeutscherAktien Index (DAX index); the Nihon Keizai Shimbun (NIKKEI) index; theBiotech index (BTK), the Dow Jones Transportation Average (DJTA); andthe like. Other economic indicators can include, for example, theConsumer Price Index (CPI) promulgated by the U.S. Department of Labor,Bureau of Labor Statistics, Division of Information Services, 2Massachusetts Avenue, N.E. Room 2860, Washington, D.C. 20212; GrossDomestic Product (GDP) promulgated by the U.S. Department of Commerce,Bureau of Economic Analysis (BEA), 1441 L Street NW, Washington, D.C.20230; foreign exchange rates; and the like.

For liquidity, a specified percentage of the original deposit may bewithdrawn at a specified interval without penalty. Interest calculatedat the end of the term will be reduced to reflect any prior partialwithdrawals. Upon death, a death benefit will be calculated, equal tothe value of the structured financial product on the date of death,calculated as if the date of death was the last day of the structuredfinancial product term. In an additional embodiment, more liquidity(even full liquidity) can be provided to help pay for qualified medicalcosts associated with a stay at a nursing home. If the customer enters anursing home and has been there for a give amount of time, such as, forexample, 60 or more days, then the structured financial product becomesfully liquid. In an additional embodiment, required minimumdistributions (RMDs) for qualified products under the federal income taxcode would be allowed penalty-free and would not count against thenormal liquidity provision built in to the structured product. And thestructured financial product would be eligible for deposit insurancefrom the FDIC.

At a specified time such as, for example, the halfway point of astructured financial product carrying a longer than 1 year term, thestructured financial product holder may choose to lock in a specifiedpercentage of index gains to date, in exchange for re-upping thestructured financial product into a new structured financial product ofequal or greater term length and using a similar return framework as theoriginal structured product The deposit for the new structured financialproduct will be calculated as the original deposit, plus the specifiedpercentage of index gains to the halfway point. The specified percentagewill be determined in pricing.

Thus, structured financial products in accordance with the principles ofthe present invention will be attractive investments due to thesimplicity of the structured financial product. In addition, structuredfinancial products in accordance with the principles of the presentinvention will accommodate a simple laddering strategy by the structuredfinancial product holder. Structured financial products in accordancewith the principles of the present invention can have a strongguaranteed component, and also offer a taste of the upside of the indexwithout a cap.

The following are non-limiting examples of structured financial productsin accordance with the principles of the present invention.

EXAMPLE 1

In accordance with the principles of the present invention, a firstexample structured financial product is provided with a minimum depositof, for example, $10,000. Terms of, for example, 1, 3, 5, and 10 yearscan be provided.

The example structured financial product can be indexed to, for example,the S&P 500 index. If the index change is positive at the end of theterm (even marginally), then the structured financial product holder iscredited with interest of X% of the deposit If the index change isnegative, the structured financial product holder is credited withinterest of Y% of the deposit. The levels of X and Y will be determinedvia pricing, but sample values could be as follows:

TABLE 2 Term X Y 1 6 2 3 25 6 5 60 10 10 125 25For liquidity, for example, 10% of the original deposit (5% in the firstyear) may be withdrawn penalty-free. The interest calculated at the endof the term will be reduced to reflect any prior partial withdrawals.

The death benefit available in the event of death prior to the end ofthe term equals the value of the structured financial product on thedate of death, calculated as if the date of death was the last day ofthe structured financial product term.

At the halfway point of a structured financial product carrying the 5and 10 year terms, the structured financial product holder may choose tolock in a specified percentage of index gains to date, in exchange forre-upping the structured financial product into a new structuredfinancial product of equal or greater term length and using a similarreturn definition framework as the original structured product. Thedeposit for the new structured financial product will be calculated asthe original deposit, plus the specified percentage of index gains tothe halfway point. The specified percentage will be determined inpricing, but the goal would be for the percentage to be at least 50% to60%. And the structured financial product would be eligible for depositinsurance from the FDIC.

Thus, the simplicity of this ‘binary’ designed example structuredfinancial product (interest at term-end is known at origination to beone of two numbers, depending upon whether the index increases ordecreases) is appealing to the investor. This example structuredfinancial product also lends itself to a simple laddering strategy bythe structured financial product holder. A customer could buy a seriesof 1 year and/or 3 year terms, and roll them over sequentially to smoothout index fluctuations.

EXAMPLE 2

In accordance with the principles of the present invention, a secondexample structured financial product is provided with a minimum depositof, for example, $5,000. Terms of, for example, 1 and 3 years can beprovided.

The example structured financial product can be indexed to, for example,the S&P 500 index. Each year, the return is calculated as X%, plus Y% ofany positive point-to-point change in the index with no cap. Values of Xand Y will be fixed for the term of the structured financial product,although any index-linked credit is available only at the end of theterm. Values of X and Y will be determined via pricing, but possibleexample values are X=2 to 3 and Y=25 to 40. For liquidity, for example,10% of the original deposit (5% in the first year) may be withdrawnannually and without paying a penalty. The interest calculated at theend of the term will be reduced to reflect any prior partialwithdrawals.

The death benefit available in the event of death prior to the end ofthe term equals the value of the structured financial product on thedate of death, calculated as if the date of death was the last day ofthe structured financial product term.

At the halfway point of a structured financial product carrying the 3year term, the structured financial product holder may choose to lock ina specified percentage of index gains to date, in exchange for re-uppingthe structured financial product into a new structured financial productof equal term length and using a similar return definition framework asthe original structured product The deposit for the new structuredfinancial product will be calculated as the original deposit, plusguaranteed declared interest, plus the specified percentage of indexgains to the halfway point. The specified percentage will be determinedin pricing, but the goal would be for the percentage to be at least 50%to 60%. And the structured financial product would be eligible fordeposit insurance from the FDIC.

Thus, this example structured financial product has a strong guaranteedcomponent to it, with an annual interest guarantee, such as, forexample, 2-3%. This example structured financial product also offers ataste of the upside of the S&P 500 without a cap. This examplestructured financial product would be appealing for the conservativeinvestor who values liquidity, and who wants to share somewhat in largeupward market moves, but with the assurance of earning at least aminimum amount of interest each year.

EXAMPLE 3

In accordance with the principles of the present invention, a thirdexample structured financial product is provided with a minimum depositof, for example, $10,000. Terms of, for example, 1, 3, and 5 years canbe provided.

The example structured financial product can be indexed to, for example,the S&P 500 index. Each year, the structured financial product holder isguaranteed to earn interest based on the best performing of threecrediting methods, for example:

-   -   X% (e.g., 2)    -   CPI % change for that year    -   Y% of change in index        The interest is calculated each year, but only credited at the        end of the term of the structured financial product. For        liquidity, for example, 10% of the original deposit (5% in the        first year) may be withdrawn annually and penalty-free. The        interest calculated at the end of the term will be reduced to        reflect any prior partial withdrawals.

The death benefit equals the value of the structured financial producton the date of death, calculated as if the date of death was the lastday of the structured financial product term.

At the halfway point of a structured financial product carrying the 3and 5 year terms, the structured financial product holder may choose tolock in a specified percentage of CPI/index gains to date, in exchangefor re-upping the structured financial product into a new structuredfinancial product of equal or greater term length and using a similarreturn definition framework as the original structured product. Thedeposit for the new structured financial product will be calculated asthe original deposit, plus the specified percentage of CPI/index gainsto the half-way point. The specified percentage will be determined inpricing, but the goal would be for the percentage to be at least 50% to60%. And the structured financial product would be eligible for depositinsurance from the FDIC.

Thus, this example structured financial product has the benefit ofsimplicity and should appeal to customers concerned about the effects ofinflation. Although depositors are giving up some index upside by havingthe CPI and declared interest floors, conservative buyers should bewilling to make this tradeoff.

In an additional aspect of the present invention, as is known in theart, structured financial products in accordance with the principals ofthe present invention can be embodied as a system cooperating withcomputer hardware components, and as a computer-implemented method. Forexample, in order to make structured financial products of the presentinvention available to the marketplace, an issuer, such as, for example,a bank must regularly price the offering. In this context, pricing meansa determination of how much index participation and how much returnguarantee will be provided to the investor. The amount of participationand guarantee will be a function of a number of financial variables,such as, for example, market interest rates (e.g., Treasuries, LIBOR),and implied volatilities. Each of these variables can affect the priceof the underlying option supporting the bank's product offer.

Due to the complexity of the above calculations of participation andguarantee level and in accordance with the present invention,computerized financial modeling systems and methods are provided whichsupport the determination of key product parameters. Such modelingsystems and methods will not only allow for the input of currentfinancial market conditions, but can also permit the issuer to performsensitivity analysis on index performance (and resulting customerbehavior), and interest rate movements and index volatility. Suchmodeling flexibility is important in order to assess risks to the issuerof allowing customer choices, such as, for example, the ability tolock-in a percentage of index growth half-way through the term. Further,such modeling systems and methods can allow the issuer to determinewhether it is achieving its desired rates of return in offering thestructured financial products of the present invention to the public.

Still further, in order to support the sales of structured financialproducts of the present invention, computerized sales support systemsand methods are provided. The computerized sales support systems andmethods of the present invention will provide tools that enable a salesrepresentative to illustrate the workings of structured financialproducts of the present invention to a prospective investor. Thecomputerized sales support systems and methods can educate a potentialbuyer of a structured financial product of the present invention byshowing the returns that would be earned under different hypotheticalindex return scenarios, as well as under actual historical returnscenarios. The computerized sales support systems and methods cancompare returns under various types of index return patterns andvolatility. Further, the computerized sales support systems and methodscan compare the performance of the structured financial product of thepresent invention to alternative investment choices, which will havepotentially different (or no) index linkage and guarantees, as well asdifferent tax treatment. The computerized sales support systems andmethods can also illustrate the performance of the structured financialproduct of the present invention on an inflation-adjusted basis, forexample, by comparing the return of the structured financial product ofthe present invention to that of the Consumer Price Index (CPI).

Computerized financial administration systems and methods will also beable to accommodate customer transactions and periodic reporting afterthe structured financial product of the present invention has beenissued. For example, such systems can calculate withdrawal amounts ifrequested by the product-holder, and also can adjust the value atmaturity of a structured financial product of the present invention inthe event of an earlier withdrawal. Further, the computerized financialadministration systems and methods can calculate the amount of the deathbenefit in the event of an account holder's death before maturity. Thesecalculations will often be complex. Finally, the computerized financialadministration systems and methods can provide periodic account reportsto the account holder on a defined timetable (or upon request).

In addition, once a structured financial product of the presentinvention is issued to an investor, it is necessary for an issuer toadminister the product. In accordance with the present invention,computerized financial administration systems and methods are providedwhich support structured financial products of the present invention.These systems can, on a product-by-product basis, track index movements,return guarantees, and timing of the application of interest to a givenproduct-holder. The administration systems and methods can maintainrecords of current account balances, and to the extent needed, can trackand report taxable income. Such administration systems and methods canalso seamlessly re-up the structured financial product of the presentinvention in the event an investor chooses to lock in gains halfwaythrough the term, as permitted under some embodiments of the offering.

CASE STUDY EXAMPLE 1

In accordance with the principles of the present invention, a case studywas created by establishing a hypothetical structured financial productfor financial analysis in selected past financial periods. In this firstcase study, the hypothetical structured financial product would have hada purchase date of 1 Jan. 1999 and a deposit of $10,000. Terms of 1, 3,5, and 10 years were analyzed. The S&P 500 index was utilized. If theindex decreases from the beginning to the end of the term, interestcredited at the end of the term was established as follows:

TABLE 3 Term Length (Yrs) Interest (% of Deposit) 1 2 3 6 5 10 10 25If the index increases from the beginning to the end of the term,interest credited at the end of the term was established as follows:

TABLE 4 Term Length (Yrs) Interest (% of Deposit) 1 6 3 25 5 50 10 125

In this first case study, if the term length was 1 year, the accountvalue at end of the term would have been $10,600 ($10,000×1.06), sincethe index increased from 1229.23 to 1,469.25. If the term length was 3years, the account value at end of the term would have been $10,600($10,000×1.06), since the index decreased from 1,229.23 to 1,148.08. Ifthe term length was 5 years, the account value at end of the term wouldhave been $11,000 ($10,000×1.10), since the index decreased from1,229.23 to 1,111.92. If the term length was 10 years, the account valueat end of the term would have been $12,500 ($10,000×1.25), since theindex decreased from 1,229.23 to 903.25.

Referring to FIG. 2, a graphical representation of the growth of the$10,000 invested on Jan. 1, 1999 and renewed for successive 1 year termsfor 10 years as set forth in this Case Study Example 1 is seen ascompared to the performance of the S&P 500 index, where the darker linerepresents the present invention and the lighter line represents the S&P500 index.

CASE STUDY EXAMPLE 2

In accordance with the principles of the present invention, a secondcase study was created by establishing a hypothetical structuredfinancial product for financial analysis in selected past financialperiods. In this second case study, the hypothetical structuredfinancial product also would have had a purchase date of 1 Jan. 1999 anda deposit of $10,000. Terms of 1 and 3 years were analyzed. The returndefinition was X%, plus Y% of any positive point-to-point change in theindex, with no cap. Again, the S&P 500 index was utilized. Values of Xwere Y were as follows:

TABLE 4 Term Length (Yrs) X Y 1 2.0 25 3 2.5 40

In this second case study, if the term length was 1 year, the accountvalue at end of the term would have been $10,688.30 ($10,000×1.06883),since the index increased from 1,229.23 to 1,469.25, which is a 19.53%increase. Twenty-five percent of 19.53% is 4.883%, plus 2%=6.883%.

If the term length was 3 years, the account value at end of the termwould have been $11,589.44 ($10,000×1.1031×1.025×1.0250). The return foreach of the 3 years was calculated according to the table below:

TABLE 5 Annual S&P 40% of S&P Year Increase Increase Add 2.5% 1   19.53%7.81% 10.31%  2 (10.14)% — 2.50% 3 (13.04)% — 2.50%

Referring to FIGS. 3-5, a graphical representation of the growth of the$10,000 invested on Jan. 1, 1999 for 3 years as set forth in this CaseStudy Example 2 is seen in FIG. 3; a graphical representation of thegrowth of a rollover of the initial investment ($11,589.44-presentinvention; $9,340.34-S&P500) on Jan. 1, 2002 for three years is seen inFIG. 4; and a graphical representation of the growth of a rollover ofthe initial investment ($14,247.25-present invention; $9,858.86-S&P500)on Jan. 1, 2005 for three years, with a one year rollover on Jan. 1,2008, is seen in FIG. 5, all as compared to the performance of the S&P500 index, where the darker line represents the present invention andthe lighter line represents the S&P 500 index.

CASE STUDY EXAMPLE 3

In accordance with the principles of the present invention, a third casestudy was created by establishing a hypothetical structured financialproduct for financial analysis in selected past financial periods. Inthis third case study, the hypothetical structured financial productalso would have had a purchase date of 1 Jan. 1999 and a deposit of$10,000. Terms of 1 and 3 years were analyzed. The return definitionvaries by length. Each year, the account holder's return is the greatestof

-   -   1% (1 year term), 1.5% (3 year term), or 2% (5 year term);    -   CPI % change for the year, or    -   30% of S&P Increase (1 year term), 45% of S&P Increase (3 year        term), and 55% of S&P Increase (5 year term).

In this third case study, if the term length was 1 year, the accountvalue at end of the term would have been $10,586.00 ($10,000×1.0586),since the index increased from 1,229.23 to 1,469.25 (19.53%), times 30%(=5.86%), and the CPI change for 1998 was 2.2%.

If the term length was 3 years, the account value at end of the termwould have been $11,563.85 ($10,000×1.0879×1.0340×1.0280), based on thetable below:

TABLE 6 Annual S&P 45% Of CPI 1.5% Year Increase S&P Increase IncreaseGuarantee Greatest 1   19.53% 8.79% 2.2% 1.5% 8.79% 2 (10.14)% — 3.4%1.5% 3.40% 3 (13.04)% — 2.8% 1.5% 2.80%

If the term length was 5 years, the account value at end of the termwould have been $13,748.70 ($10,000×1.1074×1.0340×1.0280×1.0200×1.1451),based on the table below:

TABLE 7 Annual S&P 55% Of CPI 2.0% Year Increase S&P Increase IncreaseGuarantee Greatest 1   19.53% 10.74% 2.2% 2.0% 10.74%  2 (10.14)% — 3.4%2.0% 3.40% 3 (13.04)% — 2.8% 2.0% 2.80% 4 (23.37)% — 1.6% 2.0% 2.00% 5  26.38% 14.51% 2.3% 2.0% 14.51% 

Referring to FIGS. 6 and 7, a graphical representation of the growth ofthe $10,000 invested on Jan. 1, 1999 for 5 years as set forth in thisCase Study Example 3 is seen in FIG. 6; and a graphical representationof the growth of a rollover of the initial investment($13,748.70-present invention; $9,858.86-S&P500) on Jan. 1, 2004 forfive years is seen in FIG. 7, both as compared to the performance of theS&P 500 index, where the darker line represents the present inventionand the lighter line represents the S&P 500 index.

The overall message from these case study examples is that thestructured financial products of the present invention perform well in avolatile equities market, by sharing in some of the upside, whilelimiting the downside in bad years. In the sample calculations, theproduct parameters for the structured financial products (guaranteedreturns, index participation) were chosen to be moderate, supportableparameters in most environments; however, there is no way of knowingwhat product parameters would have been established for these structuredproducts in January 1999, the selected beginning investment date forthese examples. In fact, there is no way of knowing with certainty whatthe established parameters would have been for most dates in the past.Further, the examples do not reflect use of some of the products otherfeatures, such as, for example, nursing home liquidity, RMD liquidity,death benefits, or re-up opportunities.

While the invention has been described with specific embodiments, otheralternatives, modifications, and variations will be apparent to thoseskilled in the art. For example, a further alternative to the thirdexample structured financial product may be one in which the minimumguaranteed interest rate is zero, or the only two components are the CPIand index linkages Accordingly, it is intended to include all suchalternatives, modifications and variations set forth within the spiritand scope of the appended claims

1-7. (canceled)
 8. A method of electronically pricing a structuredfinancial instrument comprising: specifying, into a memory, a minimumdeposit and a specified term; inputting, into the memory, data in atleast one economic indicator to which the structured financialinstrument is indexed; inputting, into the memory, a percentage of theoriginal deposit that may be withdrawn at a specified interval withoutpenalty; inputting, into the memory, at a specified time the structuredfinancial product holder has an option of choosing to lock in aspecified percentage of the index gains to date; and calculating, by aprocessor in communication with the memory, index participation andreturn guarantee.
 9. The electronic method of pricing a structuredfinancial instrument of claim 8 further including performing sensitivityanalysis on index performance, interest rate movements, and indexvolatility.
 10. The electronic method of pricing a structured financialinstrument of claim 8 further including inputting market interest ratesand implied volatilities.
 11. An electronic method of administering astructured financial instrument comprising: inputting a minimum depositand a specified term; tracking at least one economic indicator to whichthe structured financial instrument is indexed; determining theperformance of the structured financial instrument with respect to areturn guarantee; timing the application of interest to the structuredfinancial instrument; notifying whether a percentage of the originaldeposit is to be withdrawn at a specified interval without penalty;tracking whether a percentage of the original deposit has been withdrawnat a specified interval without penalty; reducing interest at the end ofthe term to reflect any prior partial withdrawals; notifying at aspecified time an option of choosing to lock in a specified percentageof the index gains to date and, if so, re-upping the structuredfinancial product into a new structured financial product; and in theevent of death, calculating a death benefit equal to the value of thestructured financial product on the date of death.
 12. The electronicmethod of administering a structured financial instrument of claim 11further including maintaining records of current account balances, andto the extent needed, tracking and reporting taxable income.
 13. Theelectronic method of administering a structured financial instrument ofclaim 11 further including tracking taxable income.
 14. The electronicmethod of administering a structured financial instrument of claim 13further including reporting taxable income.
 15. The electronic method ofadministering a structured financial instrument of claim 11 furtherincluding calculating withdrawal amounts.
 16. The electronic method ofadministering a structured financial instrument of claim 11 furtherincluding providing periodic account reports.
 17. An electronic methodof selling a structured financial instrument comprising: educating apotential buyer of a structured financial product comprising: specifyinga minimum deposit and a specified term; inputting data in at least oneeconomic indicator to which the structured financial instrument isindexed; inputting a percentage of the original deposit that may bewithdrawn at a specified interval without penalty; inputting at aspecified time the structured financial product holder has an option ofchoosing to lock in a specified percentage of the index gains to date.indicating, in the event of death, a death benefit equal to the value ofthe structured financial product on the date of death; and showing thereturns that would be earned under different hypothetical index returnscenarios. 18-21. (canceled)
 22. The financial instrument of claim 8further including inputting the specified time as a halfway point of astructured financial product.
 23. The financial instrument of claim 8further including inputting data in at least one economic indicatorselected from the group comprising the NYSE Composite; the S&P500; theRUSSELL 2000 index; the NIKKEI index; the FTSE index; the DAX index; theBTK index; the DJIA; and combinations thereof to which the structuredfinancial instrument is indexed.
 24. The financial instrument of claim 8further including inputting data in at least one economic indicatorselected from the group comprising the CPI; GDP; foreign exchange rates;and combinations thereof to which the structured financial instrument isindexed.